I still see people whiff this part of the budget all the time...
(please tell me you won't miss it this year 🤞).
My favorite part about the budgeting process:
It's late October 🎃... Revenue and EBITDA look good,
you're about to hit submit, and then from the shadows someone yells,
"𝙬𝙖𝙞𝙩, 𝙬𝙝𝙖𝙩 𝙖𝙗𝙤𝙪𝙩 𝙘𝙖𝙥𝙚𝙭?"
Everyone looks around and then the "ohhh whoops" feeling sets in.
We forgot capex. 𝘊𝘰𝘮𝘱𝘭𝘦𝘵𝘦𝘭𝘺.
Why? It's not part of the P&L so it often gets overlooked until the end.
The truth is --
Capital Expenditures or "𝗖𝗮𝗽𝗲𝘅" 𝗶𝘀 𝗶𝘁𝘀 𝗼𝘄𝗻 𝘀𝗲𝗽𝗮𝗿𝗮𝘁𝗲 𝗯𝘂𝗱𝗴𝗲𝘁.
It just happens to hit the Balance Sheet instead of the P&L.
There's good news, however -- it's actually a fairly easy process.
But first, what is "capex"?
Capex is cash we 𝘀𝗽𝗲𝗻𝗱 𝘁𝗼𝗱𝗮𝘆 (to acquire an asset) that benefits us 𝗶𝗻 𝘁𝗵𝗲 𝗳𝘂𝘁𝘂𝗿𝗲.
We depreciate the 𝗰𝗼𝘀𝘁 in the future to satisfy the "Matching Principle."
Why depreciate?
If I buy a delivery truck, that truck will help me generate Revenue over the next ~8 years or so (by making deliveries).
So, I need to "match" its cost against the Revenue it helps me generate.
With that in mind, here's how we can build it:
Look at the image below...
I've got two identical sections that do slightly different things.
The first is the "capex" section, and this is where I list the project and its cost.
So for the first entry, I'm saying, "I'd like to buy a $75,000 truck in Feb. of 2027 and I think it will last me 8 years (the "useful life")."
And you can see over to the right the 𝗰𝗮𝘀𝗵 𝗶𝗺𝗽𝗮𝗰𝘁 -- $75,000 goes out in Feb. of 2027.
Now, the second section:
You can see that same new truck is listed at the top, but over to the right it's different...
In Feb. 2027 you see $781 that continues monthly.
That is the 𝗱𝗲𝗽𝗿𝗲𝗰𝗶𝗮𝘁𝗶𝗼𝗻 = $75,000 / 8 years / 12 months = $781 per month.
Effectively, the depreciation makes an accounting adjustment to my cash cost so that the expense of the asset 𝙢𝙖𝙩𝙘𝙝𝙚𝙨 the Revenue it helps create.
From there, it's a link-up to my Three Statement Model:
✓ (1) Capex links to the Fixed Asset account like this: Prior Period balance 𝘱𝘭𝘶𝘴 the new Capex
(if done correctly, I should see the $75,000 in the Cash Flow Statement)
✓ (2) Depreciation links to my Income Statement, and;
✓ (3) it gets captured on my Balance Sheet in Accumulated Depreciation: Prior Period balance 𝘱𝘭𝘶𝘴 the new Depreciation
(if done correctly, this will zero out any "cash impact" of Depreciation in my Cash Flow Statement)
The net impact of it all?
Cash out the door today, but with the correct accounting treatment depreciating the cost in the future 👍
Hope this helps 🙂.
𝗘𝘅𝘁𝗿𝗮 𝗿𝗲𝘀𝗼𝘂𝗿𝗰𝗲𝘀...
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